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Squeeze Play

While it was never easy to figure out the long-term-care insurance equation, it's gotten even harder lately. Should you need any illustrations for these difficulties, listen to Meridee Maynard, VP-disability income and long-term care at Northwestern Mutual Insurance in Milwaukee, as she ticks off the percentage increases in other major companies' LTC policy premiums one by one: 51%; 67%; 47%; 60%. Northwestern Mutual's rates, she points out, have not increased since the introduction of their new product series in 1999. Or consider Robert Davis of Long-Term Care Quote (www.longtermcarequote.com), who advises advisors and consumers on LTC insurance policies, who says that the most-recent-generation policies from the major LTC insurers are "anywhere from 20% to 40% more expensive than policies they were offering 5-7 years ago." John Ryan, of Ryan Insurance Strategy Consultants in Greenwood, Colorado, who specializes in helping fee-only financial advisors select LTC policies for their clients, points out that LTC underwriting is getting tougher and the new products may offer only a "5% increase in benefits but a 25% increase in rates."

As if the price increases weren't enough, there are also fewer carriers offering LTC insurance. Major players like CNA and Transamerica have left the marketplace, making for fewer overall choices and leaving even fewer with the long track records prized by advisors comparing carriers' offerings. Aegon's decision to exit the individual LTC insurance marketplace is cited by Davis as particularly unfortunate, since it "took three major players off the table: Transamerica, Life Investors, and Monumental." While Ryan admits that the slow exodus is nothing new, he argues that it's still troubling.

Jonathan Sard, a planner in Atlanta, says that for many advisors the problem is determining not only which carrier is a good fit for the client from a pricing and product standpoint, but also which company "we think will be there for the long term." The departure of CNA and Transamerica from the marketplace concerned Sard because of their size, and because they hadn't had a "rate increase for the long term."

It's important to look at multiple carriers' offerings when recommending a policy for clients, Sard says, and cites as his favorites those from GE, John Hancock, and Lincoln Benefit. But he notes that Lincoln Benefit recently changed its product series, and in doing so raised premiums for new policyholders, which he called "somewhat typical" among LTC carriers. He recommends to clients with investable assets of less than $200,000 that they should weigh the pros and cons of purchasing LTC insurance, but he tells clients with investable assets of more than $5 million that they should consider self-insuring. Despite that advice, Sard says he has many clients who could self-fund, but still buy long-term care insurance. "They want to share the risk with the insurance company," he points out. "They're looking to protect their assets, and have purchased insurance to protect other things, so why not for nursing care?"

Sard is not alone in urging some clients to self-insure, and asking clients with lower net worth to consider whether they really can afford a policy. John Henry McDonald of Austin Asset Management in Austin, Texas, says he tells clients with "$1 million-plus" that they don't need it. McDonald notes that 91% of nursing home stays are less than five years.

How Did You Say I Can Do This?

McDonald says that he often talks to his clients' children about LTC insurance, whether or not the parents' net worth is high enough to pay for a policy. "We advise the kids to pay the premiums." Even in the case of wealthy parents, he says, he'll talk to the grown children: "Your parents are never going to run out of money," he tells them. "We're not talking about their money. We're talking about yours. You can put in $2,000, $3,000, or $4,000 a year on each parent and save your inheritance."

Such an approach is one way to deal with the necessity, or perceived necessity, of paying for long-term care. Sard also recommends that some clients have their children purchase insurance for parents who might not be able to afford the premium because of cash flow, but nevertheless have assets to protect and are worried about paying for nursing homes or home-nursing care. The professional child, he suggests, might pay all or part of the premium for those parents. He also recommends LTC insurance for parents who live in a different city than their children and can't afford a policy. "The children say, 'I'll take care of them,' but that lasts for a few weeks or months," he says, pointing out how difficult it is for adult children with careers and family demands to travel to provide care for ill parents.

Arthur Stein of First Financial Group in Bethesda, Maryland, says he points out to his small-business-owner clients the benefits of LTC insurance bought by their C corporations. "Owners of C corporations can buy policies for themselves and their spouses and no one else in the corporation, and still it's 100% deductible to the corporation," he says. Owners can buy it for themselves and their spouses, and have the corporation pay the premiums; the individuals are still owners of the policies, premiums are not treated as taxable income to the policy owners, and any benefits they receive are not treated as income either. Stein argues it's the same as health insurance premiums that are deductible to a C corporation.

Another suggestion he makes to his C-corp. clients is that they purchase a long-term care policy with a 10-pay option. Taking it a step further, he says these purchasers can also opt for a return-of-premium rider, so that if the policy is not used, all premiums are returned to the insureds' heirs. Doing it this way transfers the money out of the corporation and on to heirs without any income tax due. If the insureds do use the policy, the benefits protect the estate so that it can still be passed on to heirs and not spent on care.

Marital and Other Forms of Bliss

Stein also advises clients with prenuptial agreements to get LTC policies. "Say the poorer spouse needs long-term care; the richer spouse has to pay for that care, and Medicaid will not kick in till both spouses are impoverished, despite what it says in a prenuptial agreement," he cautions. "Without a long-term care policy, there's a big hole in the prenuptial agreement."

Spouses aren't the only ones who are concerned with LTC policies. While spouses can get a discount if both share the purchase of a policy and draw from a single pool of benefits, now there are also companion discounts. Meridee Maynard mentions these as being useful for "two elderly sisters who may be living together," as well as a man and woman who are living together but not married, or same-sex domestic partners. While there are requirements concerning the amount of time they have lived together, this option allows coverage for people who might otherwise be unable to get it.

One place to find insight into the LTC equation is from Long Term Care Partners (LTCP), the joint venture of John Hancock and MetLife that offers LTC insurance coverage to federal employees through the federal Office of Personnel Management. Paul Forte, the CEO of Long Term Care Partners, says one of the most popular options selected in customizing the LTCP policies is that of "informal" care benefits, which allow for a family member or neighbor or even a friend to be reimbursed for services they provide to the insured. "It's one of the reasons we think the program is well received," Forte argues.

The federal program, he adds, also has a "vast, significant preference" for comprehensive policies providing for home- and community-based care rather than just nursing homes. Incidentally, the federal program also has no exclusion for war or terrorism, something noteworthy among insurance programs in general and among disability carriers in particular.

Forte also says that many participants in the government program also opt for longer waiting periods, taking a 90-day waiting period instead of the 30-day option. "It's equivalent to saying, 'I'll take a little deductible in this area because I want to spend my premium dollars on things I think are more important,'" he argues. "They absorb a bit up front to get long-term advantages."

When Do I Buy It?

Assuming that you or your clients are firmly convinced that LTC insurance is an absolute necessity, at what point do you encourage them to buy it? At age 40, or 50, or 60?

There really is no single right answer, if advisors' opinions are any guide. While industry experts and advisors say insurance companies uniformly urge people to buy LTC insurance at the youngest possible age in order to lock in coverage and low premiums while they're still in good health and at peak eligibility, advisors should recall, and remind their clients, that premiums can still go up. If they buy at age 40, they may be paying on it for 30 to 40 years before they actually use the policy. Advisor McDonald, having recently bought a policy for himself, has strong feelings on the subject. "When I signed up for my long-term care insurance, I had to sign an understanding that premiums in the future could increase by as much as 20%," says McDonald, who is 55 years old. "It's pretty much guaranteed that they'll go up. You're told that you need to buy it when you're 40 and the premiums won't go up, but it's in the contract that they can raise premiums if they raise them on every class insured in the state," say for everyone over age 40. "Be prepared," he warns, "to have a rate increase even with these fixed policies."

Jonathan Sard says he brings up the subject of LTC insurance to every client over age 50, though he notes he doesn't necessarily recommend it to everyone over 50. He won't recommend it, for instance, to a client who is "50 years old and working, has lots of disability insurance, and is not retiring for the next 10 years." For business- owner clients, he will bring up 10-pay policies, particularly if they are age 54 or so and thinking about getting out in their mid-60s.

Neil Brown, a planner with Burkett Financial Services in Columbia, South Carolina, says that when recommending long-term care insurance for an individual, he considers a good "start point" to be between ages 58 and 65.

It Costs How Much?

Since avoiding rate increases is one reason to buy fixed-rate policies at a young age, what's an advisor to suggest? Consultant Ryan says that some advisors who may not have used them before are beginning to look at the limited-pay types of policies, particularly for their business-owner clients. They're also considering hybrid policies, such as MoneyGuard, a series of single-premium universal life policies from Lincoln National Life Insurance Co. that has riders that will accelerate the death benefit to cover LTC expenses. Ryan says the interest is growing in these kinds of "linked" policies, since clients are getting such low yields on CDs that "putting a large deposit on a universal life/LTC policy and getting some of the guarantees" makes more sense than it has in the past. That approach has another benefit, Ryan notes, since "it's one way to avoid rate increases, because once you make a lump-sum contribution into a policy there are no further requirements, ever." Ryan adds that people now don't trust the insurance industry not to raise rates; anything that offers a finite, known premium commitment looks more attractive.

Davis of Long-Term Care Quote.com points out that John Hancock allows the purchase of a policy without inflation protection, but with a "guaranteed right to purchase it, regardless of health problems, up to age 65." So someone with a family history of longevity but who also has family health issues could buy a policy when they're younger, he says, perhaps in their 40s, and lock in insurability before those health issues may manifest; they can still buy inflation protection later on. He explains that with 5% compound inflation protection, "in essence, after 14 or 15 years, benefits will double. At age 65 your policy is valued at $500,000. You add that 5% compound, and by the time you're 70, 15 years later, you have $1 million of coverage." While Davis admits that it can be an expensive option, for someone aged 65 whose kids are out of college and whose home is paid for, "You're not likely to need life insurance . . . and you can take $2,000 from your life insurance [expenses] and put it toward the inflation guard."

Talking Tough

Not only has LTC insurance gotten more expensive, but there are now whole blocks of the population who can't get it no matter how much they want it. Davis says some insurance companies are engaging in strategies that actively discourage the purchase of some of their products in favor of others that produce a higher return and offer less exposure. Developing new products with significantly higher prices for lifetime benefits, or eliminating lifetime benefits altogether, causes consumers to have to think hard when purchasing a policy for LTC. He cites in particular CNA, who he says was the first in the industry to institute a policy, called Independence Generation, that did not have an unlimited lifetime benefit but instead drew on a fixed-amount pool of coverage (CNA was also the first, he says, to offer a nursing home policy 30 years ago).

Relates Davis, "They went through the process of filing in all states in which they did business, got it approved more than 20 states, and then stopped--put a freeze on LTC sales." The feedback CNA got from consumer advocates and people in the industry was not positive, says Davis, partly because of the inflation protection on the policy. The pool of coverage in one of these policies would pay out at a certain rate per month; with the "inflation guard," the rate per month increased, but the pool of coverage did not. So the policyholder would, as a result, go through his fixed amount of coverage faster with the inflation protection than he would without it. A $500,000 pool of coverage, with inflation protection, will be worth the same $500,000 20 years from now. CNA, says Davis, is no longer in the individual LTC market. A CNA spokesman declined to comment.

"Of the remaining major players in the business," he continues, "the trend is obvious. While none of them has eliminated lifetime coverage as an option, in the most recent generation of products they priced it higher. It used to be that between a five-year benefit and a lifetime benefit you'd see a 20% to 25% rate increase. It's not that big a price jump. Now it's significantly higher." The reason for this, he says, is the actuaries, who are wondering how they can put a price on an unlimited claim, tantamount to "asking a mathematician to do the impossible. Ronald Reagan could have been a $1.5 million claim," points out Davis. "My prediction is that within five years, we will probably not have unlimited lifetime benefits as an option. I would encourage anyone thinking of it to purchase it now. Once they're in, [the insurance company] cannot change that contract."

Ryan says that underwriting is tightening up, too. Clients who have diseases like diabetes and arthritis, he says, are now difficult or impossible to insure. "Companies are getting a little more restrictive on what they'll offer." Davis charges that many companies won't even consider insulin-dependent diabetics, and for many conditions for which companies are getting a lot of claims, they have "backed down in terms of the units they can take, and you'd better not have any other complications or preexisting conditions." Companies are starting to "tiptoe back in [to covering insulin-dependent diabetics]," he says, "but they're typically restricting it to 50 units a day [of insulin] as a common benchmark. If you're taking more than 50 units, you would not be insurable, but anything up to 50 they will consider, assuming that you have no other preexisting conditions." One of the issues to consider, he adds, is height-to-weight ratios. Overweight people will find it harder to get coverage, as will people with other conditions in addition to diabetes.

Two out of 10 people who want LTC insurance can't get it, he says, and many of those are declined because they waited too long before deciding to buy: As they age, they become prone to more illnesses and ailments, and then are no longer able to make it through the underwriting process.

Consultant Ryan points out that when companies come out with new products, "they like to say they've never had a rate increase," but then that new policy has a "5% increase [in benefits but] a 25% increase [in price]." They don't raise rates for existing policyholders, but have new products with a bigger price tag.

In counseling advisors about LTC policies, Ryan sees a pricing trend in which new policies with a lifetime benefit and a 5% compound inflation rider are hardest hit. "Companies are telling the public not to buy the lifetime with 5% compound," Ryan claims. "They're trying to provide a disincentive." Ryan says that companies are concerned because when such policies were first developed, the average age of the consumer was 71. "Now it's around 60, and they're concerned that they have this unlimited exposure." What's the other reason, in addition to the extended life span, that there's so much liability concern among carriers? Lapse rates (in which policyholders pay their premiums for a while, and then before collecting benefits, simply stop paying and allow the policies to lapse), Ryan points out, are lower on LTC policies than actuaries had anticipated.

If these companies do increase rates on existing policyholders, predicts Ryan, they "will target more heavily policies with short waiting periods and long benefit periods, and will try to motivate clients to go with 90-day and 5-year instead of 30-day and lifetime." He theorizes that at some point companies may present a tough ultimatum to policyholders: You can keep your 30-day lifetime policy, but then you'll be hit with a 30% increase. But if you shift your policy to a 90-day, limited term, it will only be a 9% rate increase.

In the end, it comes down to you, the advisor, knowing your clients and their needs. Planning for the expense of long-term care, whether through policies or self-insurance, is a challenge whose time has not only come, but will continue to arrive as the population ages.

Marlene Y. Satter is a freelance financial journalist. She can be reached atmsatter@erols.com.